Why You Shouldn’t Measure Your Blockchain Project by Your ICO
It seems like we’re always hearing about the size of a new blockchain-based startup’s initial coin offering (ICO). Everyone on the startup team wants to see a successful ICO launch, and certainly the funding helps to keep the project moving forward and scale in the future, but it’s important to remember that the size of your ICO is not all that matters.
When it comes down to the longevity and success of a project, true success is measured by the number of users, not the amount of funding your ICO brings in. Here’s why it matters.
Speculative Nature of Some Investors
Borrowing from the world of traditional finance, ICOs often draw a significant amount of “get rich quick” investors looking to buy in and exit quickly after the token sale when some coins get listed on large exchanges like Binance, Bittrex, etc.
This speculative nature is nothing new and certainly isn’t specific to the cryptocurrency markets. To avoid this speculative pump and dump in traditional equities markets, accredited investors who have access to private placement sales before a company’s initial public offering (IPO) often have a required lock-in period. With the lock-in period, those participating in private placement aren’t able to liquidate their equity immediately after the IPO. This is done in an effort to attract more long-term investors who are looking to the future with the company they’re investing in.
However, the cryptocurrency investment community currently has nothing of the sort.
Without a set amount of lock-in time for those investing in a pre-ICO sale, there’s nothing to stop speculative investors from investing and quickly selling following a large exchange listing.
Until there are more limits placed on investors participating in ICOs and pre-ICO sales, it’s important for project leaders to remember that not all investors are truly interested in the long-term success of the project.
Recent Real-World Examples
2017 was arguably the year for ICOs. While 2018 has raised substantially more funding than last year , 2017 was the year that put the ICO model of crowdfunding on the map for not only new startups, but existing businesses as well (think: Kodak, Long Blockchain Corp, Telegram, etc.). Being the year that gave us all-time highs for the highest market cap coins, it’s no surprise that 2017 generated a lot of interest for the crypto community. However, with that interest came an increase in speculative investments that may not have otherwise been made.
To illustrate that the size of an ICO doesn’t actually indicate its success, all we need to do is look at the vast number of unsuccessful ICOs from 2017. Quite a few of their failures began with enormous fundraising in the beginning. Nearly half of all ICOs from 2017 have already failed, even with large ICOs. Just read the expansive list of failed ICO’s in DeadCoins, detailing exit scams, abandoned projects, and extinct coins.
The bottom line: Just because you have the funds doesn’t mean that you are going to succeed.
How to Successfully Expand Your User-Base
Once you have your minimal viable product (MVP), your first order of things should be focused on usage, adoption, and implementation strategies. If you don’t have users, you don’t really have a product even if you raised enough funds to put you at unicorn status.
When looking for examples of successful ICOs, perhaps no other project provides a better example than Vitalik Buterin’s Ethereum. After selling 11.9 million ETH tokens, and raising a total of $16 million in its 2014 ICO, Ethereum has become the cryptocurrency with the highest market capitalization.
While Buterin might be on a personal soapbox about decentralization, he remembers to put his personal desires in check for his user-base. At the Tech Crunch Sessions event with Jon Evans, he acknowledged that people have diverse needs, therefore total decentralization and total centralization won’t work. Thus he tries to find the perfect balance for himself and his users. Perhaps that’s the root of Ethereum’s success.
Ethereum continues to expand its user base by providing real-world value for users. The company focuses on the implementation and development of smart contracts and decentralized applications (dApps) that are relevant to the user base. For instance, he noted that “If all user authentication methods end up failing it’s going to be hard to reach mainstream adoption.” So he looks to mainstream industries outside of blockchain and cryptocurrency like WeChat for insight into their recovery systems.
That being said, while he personally thinks centralized exchanges can “burn in hell,” he recognizes that centralized systems like Coinbase might be the answer. Its ultimately up to the community at large if it goes mainstream. At the end of the day, it comes down to compromises.
It is safe to say that his Buterin’s constant straddling between his personal mission and the desire of his users is what keeps users coming back and bringing others with them.
When it comes to launching a blockchain-related startup of your own, it is easy to focus on the amount your ICO raised. However, it’s important to remember that the ICO is there to support your project and raise funding for the execution and development of your ideas, not the other way around. Determining the success of your blockchain project should be primarily evaluated by the number of users on the network. For long-term, sustainable projects, it’s the number of active users that makes a project, not the amount of funding raised in the first months of operation.